Thursday, December 24, 2009

Common Stocks And Uncommon Profits: Chapter 1

Warren Buffett has called himself "85% Graham and 15% Fisher". While the works of Graham are often cited, Fisher's book "Common Stocks and Uncommon Profits" is not. Here follows a summary of this work by Philip Fisher, known as one of the greatest investors of all time.

Fisher starts the book with the results of some of his research. While investors put great effort into timing the business cycle, the best returns in the market come from finding the great companies and holding them for many years. These companies were available year after year at attractive prices; in other words, it was not necessary to buy these companies during wide market panics. But for every company that generated such phenomenal returns, there were several times as many with average or below-average returns. As such, what was required was to be able to identify which companies could generate the uncommonly outstanding profits.

Fisher then moves to a discussion of whether such stocks will continue to exist. On this point, Fisher argues that stock investors have reason to be even more optimistic in the future as compared to the past, and for more than one reason.

First, more than ever before, corporate managements conduct themselves in a manner that is positive for shareholders. Never before have managements been so willing to seek outside advice, institute succession plans, self-analyze, and implement the most up-to-date practices. In the past, companies were closely held and managers were entrenched, with insiders taking advantage of minority stockholders.

In addition, corporations plow more money into research than they ever have before. These investments have borne fruit in the fact that a larger percentage of sales continues to come from products that did not exist only three years ago.

Finally, as compared to the first several decades of the last century, governments have shown an increased willingness to ensure that depressions to do not occur. Governments will go into deficit, and even bail out industries to ensure that business conditions are satisfactory.

All of these points bode well for the future of stock investment. With this strong future, combined with the knowledge that the investor must, either by luck or skill, identify the stocks that will generate abnormally high returns, Fisher takes the reader into Chapter 2.